Podcast Transcript I

FINRA Exams and Preparations

Announcer: Hello, and welcome to the Regulatory Compliance Podcast Series. Today we’ll join Beverly Fetcko, Manager of the Compliance Partners Program at Regulatory Compliance, and Laura Crosby-Brown, Director of Compliance, for a discussion on FINRA examinations and preparation.

Laura: Generally when FINRA comes in, FINRA will provide a notice that they’re coming in to visit you. The notice is usually 30 days in advance, although there’s no requirement for FINRA to do that 30 days in advance. They send out a records request list, which basically is a questionnaire regarding the firm’s business, their ownership, their structure, their offices and things like that. This is so that FINRA can get a really good idea about the firm, has anything changed?, so they can tailor their exam. And the second piece is that they get a documents request, and the documents request deals with the specific books and records that FINRA is going to look at while they are at the firm.

So the key here, for the firms really upfront, is that they address the information request accurately and timely so that FINRA has time to evaluate before they send out the documents request. And then when they get the documents request, take a look at the things FINRA is asking for, and if they have any questions, call us or call their FINRA examiner and say, you know, “I don’t understand what you’re looking for here” or “We don’t have this, is this called something else?”, because sometimes FINRA uses words to describe books that the firms may not use themselves.

Beverly: The other thing is we also see that typically they ask for the larger documents ahead of time, like the, your written supervisor procedures manual and anti-money laundering procedures and business continuity plans. Those are items they can scan and look for key words to make certain that the firm is addressing everything that needs to be addressed. The main thing that a firm should do is to stay current on all of their compliance.

Laura: The real key here is documentation. Your procedures manual may say you’re doing something, that you’re addressing a requirement of the rules, but unless you have documentation to show you are, the regulators don’t know it. You have to be able to show them hard evidence. And that’s really what they’re looking for in an exam, they are looking to make sure you’re doing things like testing and verifying your procedures, that if you’re saying that your reps have to sign an attestation, that they understand something, that they really signed it. Know what your procedures say, make sure they are current, make sure that they say what you say you’re doing.

Beverly: We have clients that we assist in their ongoing compliance. We keep them current with all of their notifications. We let them know what they need to be filing. We remind them of different events that are taking place. We update their written supervisory procedures manuals and their money laundering manuals with any changes. We remind them to look over their business continuity plan, review that, make certain that all the information in that is accurate on an annual basis. We hope to guide them through reminding and through actual filings.

Laura: We have what we call a mock FINRA books and records exam, where we can go out and, using an audit module that we’ve created, we’ll actually look at the books and records that we know FINRA looks at to make sure that what the firm has meets the requirements under the rules. The other piece we have is what’s called a, it’s sort of a FINRA audit prep meeting, so that when a firm gets notified that FINRA’s coming in they can call us, we can come to the firm, we can help them assemble the documents for FINRA.

Beverly: With respect to that, there’s a lot of things that FINRA will call, they may just address something as a, your 3012 procedures, and a firm has no idea what those actually encompass because 3012 is a very broad rule. And, with us calling in, we can hone down into exactly what they’re asking for specifically in each situation, and make sure that it’s appropriately either filed or documented in their files.

Laura: We have a program called a, we termed it a “new BD setup visit” and basically it’s really designed for a new firm whose having their first FINRA exam, but it’s certainly appropriate for any BD to just come in and sort of take a step back and say, “these are the required files you’re supposed to have, do you have them, do you understand what needs to be in them?” And then we have another visit where we can go in after they’ve received their documents request list from FINRA, and it’s more of a consulting visit than anything else.

Beverly: If they can spend 10 or 15 minutes in the beginning of an exam with the FINRA people to explain exactly how they conduct their business and what their business consists of, that helps an awfully lot. There’s a lot of, not all broker-dealers are out of the same mold. They all have to apply the same rules and regulations, but they all don’t transact their business in the same fashion. So, if they can explain the limited scope, if they have a limited scope of business, then that also will help to alleviate a lot of unnecessary requests in trying to explain it throughout the exam period that “I don’t do that type of business.”

Laura: That’s actually a required piece of the FINRA exam program. FINRA examiners are supposed to be sitting down with the firm when they first come in to get that picture, to really understand what the business is, who’s responsible for what and things like that. The other big pitfall with exams is, and it goes back to knowing the business, a lot of firms will look at the documents requests lists and if something doesn’t apply to them, they’ll ignore it.

Now what that does when the examiner comes in is then they go, “Well, are they supposed to give this to me and they didn’t, why are they ignoring this request?”, and things like that. So one of the things I tell firms when they call me and say, “Oh my God, FINRA’s coming in,” is the first thing is take your documents requests list and make sure you address every single item on that list, whether it applies to you or not.

If it doesn’t apply to you, create a little file folder that has the name of the request on it  and put a piece of paper in it that says, “This is not applicable to my firm because….” That way when the examiner pulls that file, they’ve got something in there and they can go, “Okay that makes sense,” or if they have additional questions they’ll know who to ask and they don’t think you’ve just ignored them. In their final report there shouldn’t be any surprises, and we’ll send a written exit conference checklist. Firms are not required to respond to that any longer. They used to have to respond to it in 14 days.

So firms should respond to an exit only if they feel that it’s necessary for the exam manager, and for the district’s supervision staff to get a clear picture of things that happened in the exam that maybe weren’t quite right. About 30 days after FINRA finishes their on-site, they will send a final report. Firms are required to respond to this final report, even if it’s FINRA reminding you that you’re supposed to do something. You have to explain to them how you’re going to mitigate these findings in the future.

Once FINRA gets that response it’s reviewed by the senior management team at the district, and they will issue a disposition letter for the exam. Most exams, according to the last meeting I was in with FINRA, are closed without cause, so they’re closed without fines, they’re closed without enforcement action. FINRA exams are really designed to make sure the firm is on the right track and communicating with them. Communicating with compliance support staff, your FINOP, everybody, is really key to making sure this is a good relationship. FINRA is a self-regulatory organization. It is really driven by its members. So its members need to take responsibility, too, and communicate if there’s issues, if there’s problems, they have questions, if they need help.

Beverly: And they are also designed to make certain that the client or consumer is protected. By FINRA looking out to protect the client, by giving that a little bit more oversight, they are also protecting the firm from some heavy duty liability should there be something happening within the firm that they just were not aware of.

Announcer: This concludes our discussion on FINRA examinations. We invite you to contact Beverly or Laura at any time if you have questions related to this or other regulatory topics, and feel free to join us for other discussions as part of this podcast series found on this site.